CIM Small Business Loan Trust

Transcription

1 Presale: CIM Small Business Loan Trust May 14, 2018 This presale report is based on information as of May 14, The ratings shown are preliminary. This report does not constitute a recommendation to buy, hold, or sell securities. Subsequent information may result in the assignment of final ratings that differ from the preliminary ratings. Preliminary Rating Class Preliminary rating(i) Interest rate (%) A AA (sf) Lesser of one-month LIBOR plus a spread and the prime rate minus a spread Preliminary amount (mil. $) Initial overcollateralization and reserve (%) SDR (%) BDR (%) BDR cushion (%) (i)the rating is preliminary and subject to change at any time. SDR--Scenario default rate. BDR--Break-even default rate. Transaction Profile PRIMARY CREDIT ANALYST Srabani C Chandra-Lal New York (1) SECONDARY CONTACT Maxym Rumyantsev New York + 1 (212) ANALYTICAL MANAGER Kate R Scanlin New York (1) Expected closing date May 22, Stated maturity date March 20, Collateral Note payment frequency Underwriter Seller and servicer Depositor Indenture trustee, backup servicer, administrator, and custodian Owner trustee An amortizing pool of unguaranteed SBA Section 7(a) small business loans. Monthly on the 20th. Sandler O'Neill and Partners L.P. First Western SBLC Inc. First Western Depositor LLC Wells Fargo Bank N.A. Wilmington Trust N.A. SBA--Small Business Administration. May 14,

2 Rationale The 'AA (sf)' preliminary rating assigned to CIM Small Business Loan Trust 's $38.2 million unguaranteed U.S. Small Business Administration (SBA) 7(a) class A loan-backed notes reflects our assessment of: - Credit enhancement in the form of overcollateralization, a funded reserve account, and excess spread; - The transaction's legal structure, which is intended to be bankruptcy-remote; - The collateral portfolio, which is concentrated in limited-service hotels and consists of unguaranteed SBA Section 7(a) term loans; - Our expectation of timely timely interest and ultimate principal payments on the notes, which we assessed using the Standard & Poor's Cash Flow Evaluator and assumptions commensurate with the preliminary rating assigned under various interest rate scenarios; and - First Western SBLC Inc.'s servicing capability. - The backup servicer, Wells Fargo Bank N.A. will be in place at closing and will reconcile its records with the servicer on a monthly basis. Pool And Structural Characteristics S&P Global Ratings expects the series collateral portfolio to include unguaranteed loans under the Section 7(a) Loan Program of the U.S. SBA. Over 95% of the collateral is concentrated in limited-service hotels, and over 99% of the loans have a first lien on the commercial real estate. The identified collateral pool as of April 30, 2018, presented to S&P Global Ratings for its rating analysis had the characteristics shown below. Table 1 Pool Characteristics Unguaranteed loan balance (mil $) Number of loans 157 Interest rate type Prime Weighted average loan rate (%) 7.00 Average spread over prime (%) Average current principal balance 303,916 Weighted average original term to maturity (mos.) 266 Weighted average seasoning (mos.) 34 Loan purpose (%) Purchase land and improvements Pay outstanding debt 7.99 Purchase land and improvements/make renovations to an existing building 3.2 Purchase outstanding stock/pay outstanding debt 2.13 Leasehold improvements May 14,

3 Table 1 Pool Characteristics (cont.) Pay outstanding debt/make renovations to an existing building 1.31 Make renovations to an existing building/pay outstanding debt 1.27 Make renovations to an existing building/purchase furniture and fixtures 0.95 Purchase outstanding stock/make renovations to an existing building 0.45 Construction/pay off existing loan 0.24 Leasehold improvements/working capital 0.18 Industry (%) Hotels 96.7 RV parks 1.59 Services 0.58 Gasoline 0.49 Health care 0.34 Restaurant 0.26 Geographic concentration by top five states (%) IN OH MI TX 8.64 VA 5.75 Underwriting First Western SBLC originates loans to highly concentrated borrowers in the limited-service hospitality industry. The SBA is a U.S. government agency that supports entrepreneurs and small businesses with loans made through partner banks, credit unions, and other lenders. First Western has been an SBA 7(a) lender since 1983 and is a nationwide preferred lender. First Western is the seller and servicer for the series 's loan collateral. All loans must meet the SBA guidelines. In addition, the underwriting guidelines include: - A maximum loan-to-value ratio of 85%; - FICO scores of 600 or greater; - Personal guarantees of all owners with 20% or more ownership; and - A minimum 1.15X debt coverage ratio. Prior to approving a loan, the loan committee evaluates factors such as the repayment ability, personal credit, net worth of the guarantors, performance of any affiliate businesses, location, competition, and management experience. A site visit is required for each loan origination that is primarily secured by commercial real estate. May 14,

4 Structural Overview CIM Small Business Loan Trust is a special-purpose entity that was formed as a Delaware statutory trust. The issuer acquires the collateral portfolio, issues the rated notes and equity, enters into the transaction documents, and engages in certain related transactions. S&P Global Ratings expects the issuer's special-purpose entity provisions to be consistent with its bankruptcy-remoteness criteria. In rating this transaction, S&P Global Ratings will review the legal matters that it believes are relevant to its analysis, as outlined in its criteria. Credit Support Overcollateralization, excess spread, and a reserve account provide credit support to the notes. At closing, the reserve account will equal $715,722, and no additional amounts are to be deposited afterward. The trustee may withdraw from the reserve account if needed to pay note interest or principal due to shortfalls in available funds according to the payment priority waterfall. The excess spread amount available at any time will be determined by gross defaults, prepayments, recoveries, and the interest rate. We apply rating-level specific assumptions that incorporate these factors in our cash flow stress tests. Payment Priority Table 3 Fees And Expenses Annual expense cap Backup servicing fee Servicing fee Indenture trustee/administrator/ custodian fee Owner trustee fee $100,000 annually but not applicable upon an indenture default. $2,500 per month. 1.00% annually. $2,750 per month. $5,000 annually. Table 4 Payment Priority Priority Payment 1 Owner trustee fee, indenture trustee/administrator/custodian fee, backup servicer fee, and unreimbursed out-of-pocket expenses (subject to a $100,000 annual expense cap in aggregate per year) in all cases as unpaid or unreimbursed for current and prior periods. 2 To the class OC-1 certificates, unreimbursed advances 3 Current and any carry-forward class A note interest. 4 Class A note principal until reduced to zero. 5 Unpaid applied loss amounts to the Class A notes 6 Any fees and expenses not paid in item 1 above due to the annual expense cap. 7 Any remainder to ownership certificates. May 14,

5 Writedowns Losses on the loans will be covered by the reserve account and overcollateralization. If the portfolio balance plus the reserve balance falls below the outstanding note balance at any payment date, the applied loss amounts may result in a writedown of the notes' principal amount until the note principal balance is reduced to zero. If in future periods sufficient collections allow the portfolio balance to be restored to exceed the outstanding note balance, these subsequent recoveries can be applied to increase the note principal balance to reimburse the writedowns. In our credit and cash flow analysis, we did not observe instances of such writedowns in the stress cases we conducted. If a given run had exhibited a writedown in our stress scenarios, we would have deemed it a defaulted run because the notes would not receive the full interest amount. Credit Analysis Historically, we have analyzed pools of small business loans using an actuarial approach based on the seller's historical lending data. We began using our Small Business Portfolio Evaluator in 2005 to incorporate a SBA-data-driven analysis. This model uses Monte Carlo simulations to determine a specific default distribution for small business loan pools (for more information, see "Small Business Portfolio Evaluator (Update)," published Nov. 23, 2016). To give credit to the series loan pool's diversification, we ran the entire portfolio through the model. In March 2014, we introduced our revised methodology for U.S. small business loan-backed securitizations in which we applied a targeted output approach and a scoring framework to derive an asset probability of default (PD) scaling factor. The scoring framework incorporates multiple factors for the performance history score (80% weighting to overall score), including the originator's default rate relative to the SBA data, the number of years of historical origination and default data, and whether the performance history incorporates a period of moderate economic stress. For the underwriting quality score (20% weighting), we consider factors such as the loan-to-value ratio, the percentage of the pool with personal guarantees, the average debt service coverage ratio, the frequency of changes to the underwriting criteria, and any regular outside audits of underwriting practices. We assigned First Western a performance history score of 3.0 and an underwriting quality score of 1.6 based on the information provided to us during the analytical process. Given the 80/20 weighting of these two scores, the overall scoring framework is 2.72, which corresponds with a % asset PD scaling factor (out of a possible 75%-125% scaling factor range for an SBA loan pool). Interest Rate Mechanics The underlying loans pay interest based on the prime rate plus a margin. The interest rate on the class A notes is the lesser of one-month LIBOR plus 1.75% and prime minus 0.76%. We applied different interest rate scenarios to each default pattern as described in our small business criteria. We found the result to be within an acceptable range for a 'AA' rating category. Stress Scenarios In reviewing the credit enhancement, our cash flow modeling assumptions included stressed loan defaults and recoveries after considering industry diversity within the pool, the pool's geographic May 14,

6 concentration, and the obligor concentration, as well as assumed recoveries on certain collateral types in the pool. The transaction's ability to pass the cash flow stress scenarios relied on the assumption that the servicer and the trustee, as backup servicer, will perform as required under the transaction documents. We also varied the prepayment assumptions to include slow- and fast-pay scenarios in addition to base prepayment scenarios. Under the various stresses described above, the transaction's cash flows indicate timely interest and principal payments on the class A notes commensurate with the assigned preliminary rating. Surveillance We will maintain surveillance on the rated notes until they mature or are retired. The purpose of surveillance is to assess on an ongoing basis whether the portfolio of loans is performing within the initial parameters and assumptions applied for the given rating level. The issuer is required under the terms of the transaction documents to supply periodic reports and notices to S&P Global Ratings to maintain continuous surveillance on the rated notes. Related Criteria - Criteria - Structured Finance - General: Methodology And Assumptions For U.S. Small Business Loan-Backed Securitizations, March 28, General Criteria: Global Investment Criteria For Temporary Investments In Transaction Accounts, May 31, Criteria - Structured Finance - General: Standard & Poor's Revises Criteria Methodology For Servicer Risk Assessment, May 28, Legal Criteria: Legal Criteria For U.S. Structured Finance Transactions: Special-Purpose Entities, Oct. 1, Legal Criteria: Legal Criteria For U.S. Structured Finance Transactions: Appendix III: Revised UCC Article 9 Criteria, Oct. 1, 2006 Related Research - Global Structured Finance Scenario And Sensitivity Analysis 2016: The Effects Of The Top Five Macroeconomic Factors, Dec. 16, 2016 In addition to the criteria specific to this type of security (listed above), the following criteria articles, which are generally applicable to all ratings, may have affected this rating action: "Post-Default Ratings Methodology: When Does Standard & Poor's Raise A Rating From 'D' Or 'SD'?," March 23, 2015; "Global Framework For Assessing Operational Risk In Structured Finance Transactions," Oct. 9, 2014; "Methodology: Timeliness of Payments: Grace Periods, Guarantees, And Use of 'D' And 'SD' Ratings," Oct. 24, 2013; "Counterparty Risk Framework Methodology And Assumptions," June 25, 2013; "Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings," Oct. 1, 2012; "Methodology: Credit Stability Criteria," May 3, 2010; and "Use of CreditWatch And Outlooks," Sept. 14, May 14,

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